EU’s Muted Crimea Response Triggers Russian Stock Rebound

A giant sign for OAO Gazprom stands above a building in Moscow. Gazprom's stocks are trading at more than half their historical valuations in Moscow, according to data compiled by Bloomberg. Photographer: Andrey Rudakov/Bloomberg

March 24 (Bloomberg) -- Russian stocks trading in New York
snapped a four-week slide as the European Union, the nation’s
biggest trading partner, refrained from imposing economic
sanctions after the annexation of Crimea was completed.

The Bloomberg Russia-U.S. Equity index of the most-traded
Russian shares in the U.S. rallied 2.2 percent to 80.27 last
week, the most in more than a month. OAO Mechel, the country’s
largest producer of coal for steelmakers, capped the biggest
weekly surge since 2012, while OAO RusHydro climbed 9 percent.
RTS index futures declined in U.S. hours March 21.

While the EU will weigh curbs on business and investment,
it said last week that President Vladimir Putin hasn’t crossed
the destabilization threshold amid the worst standoff between
Russia and the West since the Cold War. The 28-nation bloc is
moving more slowly than the U.S. on sanctions, with President
Barack Obama authorizing on March 20 potential future penalties
on Russian industries from financial services to energy.

“The sanctions are still fairly cosmetic and won’t affect
companies as well as the economy,” Mattias Westman, the chief
executive officer of London-based Prosperity Capital Management
Ltd., which manages about $3 billion in Russian and former
Soviet country’s assets, said by phone March 21. “If you are a
long-term investor, it’s a good time to buy.”

Russian equities have the cheapest valuations among 21
developing countries monitored by Bloomberg, with shares on the
Micex Index trading at 4.8 times projected earnings, compared
with a multiple of 9.1 for the MSCI Emerging Markets Index.

Gazprom, Sberbank

Westman said companies including Russian gas monopoly
exporter OAO Gazprom and OAO Sberbank, the nation’s largest
bank, are the most attractive. Both stocks are trading at more
than half their historical valuations in Moscow, according to
data compiled by Bloomberg.

Putin signed legislation last week completing the process
to annex Ukraine’s Black Sea peninsula of Crimea, ignoring
expanded sanctions. The EU added 12 Russian and Crimean names to
its blacklist on March 21, bringing to 51 the number of Russian
and Ukrainian politicians, officials and military commanders
penalized by the European bloc. Businesspeople who face U.S.
bans weren’t sanctioned by the EU.

European leaders also signaled Russia may face further
repercussions if it doesn’t stop what they see as destabilizing
actions in Ukraine. They vowed to wean the EU off oil and gas
from Russia, echoing a pledge made in 2008 after Russia fought a
five-day war with Georgia over a breakaway province.

‘Huge Blow’

In a March 18 speech to lawmakers, Putin blamed Western
encroachment for forcing him to take control of Crimea and said
Russia doesn’t plan to further split up Ukraine. Still, the
massing of Russian troops near Ukraine’s borders has raised
concerns that Putin may push further into the second most
populous former Soviet republic.

“The crisis is far from being solved and Russian troops
remain at the Ukrainian borders,” Ilya Kravets, the New York-based director of investment research at Daniloff Capital LLC,
said by phone March 21. “The sanctions war isn’t over either.
The U.S. has been very clear about potential measures targeting
certain sectors of the economy, while the EU is also considering
economic sanctions, which, if imposed, would be a huge blow for
Russia. The uncertainty is still there.”

Last week’s advance trimmed this year’s slide in the
Bloomberg Russia-U.S. gauge to 22 percent. American depositary
receipts of Mechel surged 19 percent to $2.04 last week, trading
at an 85 percent premium to their Moscow-listed shares.
RusHydro, a Russian renewable energy producer, increased to
$1.46 and capped the best week since May 2013.

The Market Vectors Russia ETF, the biggest U.S. exchange-traded fund that holds Russian shares, gained 2.3 percent to
$22.31 last week. The RTS Volatility Index, which measures
expected swings in futures, fell 1.4 percent to 47.67 in U.S.
hours March 21, while RTS stock-index futures dropped 0.6
percent to 110,410.